Sam Reynolds: Further government regulation will stymie Internet innovation in Canada

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      Over the past number of weeks, a populist movement against usage-based billing has been steadily building. Opponents of UBB, who favour net neutrality—government regulation that requires all data online to be treated equally—breathed a collective sigh of relief when Minister of Industry Tony Clement announced this week he would review recent regulatory decisions that would permit UBB.

      A review of UBB resulting in its reversal is not a certain thing, but using Clement’s blocking of the Potash Corporation of Saskatchewan takeover as a case study it is likely that we will see a regulatory flip-flop. In the instance of PotashCorp, Clement took the populist side over that of the corporation, seemingly ignoring any critical arguments for allowing the takeover to go through. Although this case is different in many ways, it is safe to believe that Clement will side with this populist movement without examining the argument that perhaps further government regulation will perhaps stymie Internet innovation.

      An argument often put forward by opponents of UBB is that Canadians lack consumer choice when it comes to ISPs. UBB, in their opinion, further deprives consumers as ISPs that buy wholesale bandwidth from providers such as Bell now have their supply costs dramatically increased, which limits their competitive advantage. Ontario-based ISP TekSavvy, which is wholly dependent on wholesale bandwidth from Bell is caught in the middle of this. The solution to this telecom deficiency that the anti-UBB crowd backs is to regulate our way out of it.

      The Canadian Radio-television and Telecommunications Commission, which falls under Clement’s ministerial portfolio, is notorious for putting up roadblocks to impede customer choice. An example of their bureaucratic bullying can be found in the case of Wind Mobile. Despite having the green light from Industry Canada, the Byzantine ownership restrictions imposed by the CRTC delayed Wind Mobile’s launch by nearly half a year. Naguib Sawiris, the Egyptian technology entrepreneur who is backing Wind, went as far as to call Canada a “telecom backwater” because of its extensive regulations. In this case, consumers were worse off because of hefty government regulation.

      Thus, the way to solve Canada’s ISP insufficiency is not through regulatory flip-flopping but to let the free market work its magic. CADVision, which was once a titan in the Calgary ISP market, was built by a recent university graduate who was fed up with the current offerings from ISPs in the city. CADVision was fuelled by the lack of innovation in the ISP market, and despite being built for only a paltry sum, grew exponentially and offered ADSL services years before any other provider could. Regulation didn’t create this success story, the market did.

      The market force that is UBB is causing innovation within the small ISP sector. Realizing that they need to be immune from the whims of government that allow for potential price gouging these firms have started to invest in their own infrastructure that will allow them to bypass Bell or other bandwidth wholesalers. It might be that these independent ISPs invest in new technology that would allow them to deliver a better product than what they had previously.

      What will make any Internet innovation flat line is if providing this service suddenly becomes unprofitable. If the CRTC enforces a price cap, this will limit the money there is to be made in delivering the Internet to consumers and thus limit incentive to innovate. Just as interest in fuel-efficient vehicles such as the Toyota Prius skyrocketed when the price of gas was high, the threat of high-priced bandwidth will create incentives for companies to try and bypass the big ISP cartel.

      What will stymie this innovation is if Clement decides to reverse the CRTC’s decision on UBB. Small ISPs will then loose the incentive to fight for their survival—to innovate. Perhaps in the near future, high-density population centres like downtown Vancouver or Toronto will be saturated with a variety of ISP options from 4G wireless to fibre. If the consumer demands more options to access the Internet and the current players in the market don’t offer this, someone will step in and innovate. It has happened before and it will happen again.

      Sam Reynolds is a freelance writer and a contributor to the Peak student newspaper at Simon Fraser University.

      Comments

      6 Comments

      Birdy

      Feb 3, 2011 at 4:43pm

      This reads like a classic "defend an indefensible position" essay assignment.

      " If the CRTC enforces a price cap, this will limit the money there is to be made in delivering the Internet to consumers and thus limit incentive to innovate."

      Your conceptual understanding of a free market is interesting, but if you're truly a market lover, you should know that free markets don't work in open border welfare states like Canada. Friedman would explain to you that open borders plus a social safety net equals an absolute requirement for price and wage controls. In order for your market dream to flourish we'd need to either close the border (immigration and temp. workers) or drop the social safety net (healthcare, education, subsidized transit) Obviously doing either of those horribly unpopular things wouldn't fly with the citizens, so we are stuck with price controls.

      Don't get me wrong, it's still an unsustainable system that will eventually fail, but any kind of deep change now would cause too much unrest for the system to handle.

      Ken Lawson

      Feb 3, 2011 at 9:38pm

      Sam Reynolds why do you not pay for my internet then it is obvious you are getting yours free at SFU, until your paying shut with your wing nut ideas. Im already paying $75.00 a mth for internet only, how much more do you want me to pay

      Nice logic, bro

      Feb 3, 2011 at 9:47pm

      When firms introduce barriers to the consumers in the market it's called "Innovation"

      When the people don't want the barriers in the market it's called "stymieing the innovation"

      We're dealing with a molopoly here. There are serious barriers for firms to enter the market. Also, elasticity of demand is very low. Access to information is becoming a basic need.

      kalimkassam

      Feb 4, 2011 at 12:37am

      You're grossly mistaken: Milton Friedman's argument was not that open markets do not work in a welfare+free immigration state. Friedman did once say "You cannot simultaneously have free immigration and a welfare state" but I think if you consider Friedman's lifelong advocacy against controls on prices and wages and <a href="http://www.vdare.com/misc/archive00/friedman.htm">read the context</a> of that quote it's impossible to sustain your interpretation. His view was that either open immigration or the welfare state had to go, not market-determined prices. Where did Friedman say there is an "absolute requirement for price and wage controls? To my knowledge, nowhere.

      seth

      Feb 4, 2011 at 8:39am

      More fascist claptrap from the malevolent folks at the Fraser Institute.

      Hydro Quebec just won first for the most efficient best run utility in North America. Public utilities win every time.

      Do you want 5 power, 10 water and 3 sewer pipes into your house one for each competitor. We already have 2 telecom pipes you want more?

      There are no innovations waiting in the telecom game, that a small ISP is capable of that a public utility can't do at a fraction of the price. You run a 10 GiGE capable pipe into each building cover the landscape with wireless and connect it all up. The technology to do this is well understand and the cost is down to less than $200 a household.

      BCHydro could put Telus and Shaw out of business for less money than they are planning on spending on Smart meters and as a part of the smart meter project.

      They of course won't be allowed to since you fascists own the current government and the Big Telecom unions the opposition.
      seth

      Rob L

      Feb 4, 2011 at 8:58am

      Sorry but this argument is ridiculous in this case. Nobody is saying or expecting there to be some cost cap. The problem is that people don't want some supposed "neutral" agency basically being in bed with Bell (and the other 2) and allowing them to pretty much wallet rape anyone who doesn't want to be a customer of theirs and it is CLEAR that is what this is. It costs something like 3-10 cents per gig for these providers yet they want to charge 1.5-2 bucks per overage gig...how can ANYONE defend that unless they are shareholders of Bell or Rogers?

      This isn't about the government getting involved to regulate, it is about the government getting involved to stop a supposed neutral board from allowing companies to steal from consumers because they can't accept competition.

      What people should be talking about is why don't Bell and Rogers actually star to be competitive instead of crying to the CRTC and trying to kill off their competition. Nobody is stopping Bell from offering more attractive and more competitive packages which could possibly keep people staying with them rather than switching to ISPs like Teksavvy. Nope, instead Bell just goes and cries and gets their way. Sorry but I nor any Canadian should accept and reward that type of policy.

      If you want to talk about the "market" then the market says you improve your product so people actually want it rather than crying to boards/regulators to get your competition killed. Not only does Bell want to kill these independent ISPs, they wan to kill off streaming services as well so more will go and buy their TV packages.

      Another thing I find funny about the argument of Bell/others about how heavy users shouldn't be subsidized and pay their share is it isn't like they are saying the base package should be lower. They want to impose this ridiculous 25GB cap yet the price isn't changing from before when the cap was much higher. How can people not see that as basically stealing? If they care so much for the low use users then why not lower the price for them? Nope, can't do that.

      Another thing people need to realize is that you pay more for an unlimited plan at places like Teksavvy. I have one and pay $8-9 more per month for it so I am already paying extra for my usage. Would I have a problem paying more for it? No although it needs to be fair, not $2 per gig and having a bill of $100+ and still having a cap. I'd be fine paying $50 or maybe even $60 for my current service.

      I also think that even if these small ISPs were to innovate and go it alone that Bell would just go cry to the CRTC over something else and they'd get their wish which would hurt those other companies. It's clear they will do what Bell wants at the cost of actual competition and/or what is best for Canadians.